Capital Cost Allowance (CCA) is the means by which Canadian businesses may claim depreciation expense for calculating taxable income under the Income Tax Act (Canada). Similar allowances are in effect for calculating taxable income for provincial purposes.
Capital property eligible for CCA excludes: [1]
CCA is calculated on undepreciated capital cost ("UCC"), which is generally defined as: [2]
Where the UCC for a class is negative, a recapture of depreciation is deemed to take place, thus adding to taxable income and bringing the balance of UCC back to zero. Where UCC for a class is positive, but all assets with respect to that class have been disposed of, a terminal loss is deemed to take place, thus deducting from taxable income and bringing the balance of UCC back to zero. [3]
CCA itself is generally calculated using the following items:
For assets subject to the full-year rule:
For assets subject to the half-year rule:
Under the Income Tax Act: [6]
Part XI of the Income Tax Regulations provides for the calculation rules for CCA, [8] and Schedule II outlines the various classes of capital property that are eligible for it. [9] Special rules are in place to deem certain assets to be in separate classes, thus not becoming part of the general pool for the class. [10] Certain elections are available to taxpayers to transfer or reclassify assets from one class to another. [11]
Additional allowances are prescribed with respect to specified circumstances. [12] Specialized calculations for certain classes are also outlined in:
Part XVII of the Income Tax Regulations provides for specialized calculation rules for CCA with respect to capital property acquired for use in earning income from farming and fishing. [21]
CCA is calculated under the half-year rule, except where otherwise specified, with respect to the following classes.
Class | Rate | Description |
---|---|---|
1 | 4% | Buildings acquired after 1987 |
3 | 5% | Building acquired before 1988 |
7 | 15% | Canoes and boats (including their fittings, furniture and equipment) |
8 | 20% | Assets not included in other classes (common examples include furniture, equipment not used for manufacturing and processing, and tools costing more than $500) |
9 | 25% | Aircraft |
10 | 30% | Automobiles (including passenger vehicles costing less than $30,000, trucks, vans, etc. - but not taxis), computer equipment and systems software for that equipment |
10.1 | 30% | Passenger vehicles costing more than $30,000 (including taxes). Each vehicle must be kept in a separate class, and no terminal loss may be claimed. |
12 [22] | 100% (full-year rule) |
|
100% (half-year rule) [23] [24] |
| |
13 | Original lease period plus one renewal period (Minimum 5 years and Maximum 40 years) | Improvements made to leased premises |
14 | Length of life of property (full-year rule) | Franchises, Concessions, Patents, and Licences |
17 | 8% | Parking lots |
29 | 50% straight-line (effectively allocated 25%-50%-25% over three years) | Eligible machinery and equipment used in Canada to manufacture and process goods for sale or lease, acquired after March 18, 2007, and before 2016 that would otherwise be included in Class 43. |
43 | 30% | Manufacturing and processing equipment not included in class 29 - may be kept in separate classes by filing an election |
44 | Patents acquired after April 26, 1993 | |
45 | 45% | Computer equipment and systems software acquired after March 22, 2004 and before March 19, 2007 |
46 | 30% | Data network equipment acquired after March 22, 2004 |
50 | 55% | Computer equipment and systems software acquired after March 18, 2007 |
52 | 100% (full-year rule) | Computer equipment and systems software acquired after January 27, 2009 and before February 2011. Only applies to new equipment used in Canada. |
In contrast to the practice followed in the United States for depreciation there is no penalty for failing to claim Capital Cost Allowance. Where a taxpayer claims less than the amount of CCA to which he is entitled the pool remains intact, and available for claims in future years. Unclaimed amounts are not subject to recapture.
Because assets subject to CCA are generally pooled by class, and CCA is generally calculated on a declining-balance basis, specific techniques have been developed to determine the net present after-tax value of such capital investments. For standard scenarios under the full-year rule and half-year rule models, the following standard items are employed: [25]
More specialized analysis would need to be applied to:
Capital cost allowance will be calculated as follows: [26]
Year | Calculated CCA |
---|---|
1 | |
2 | |
3 | |
n |
Therefore, the Tax shield in year n = , and the present value of the taxation credits will be equal to
As this is an example of a converging series for a geometric progression, this can be simplified further to become:
The net present after-tax value of a capital investment then becomes:
For capital investments where CCA is calculated under the half-year rule, the CCA tax shield calculation is modified as follows:
Therefore, the net present after-tax value of a capital investment is determined to be:
In cases where claims have been contested or disallowed by the Canada Revenue Agency, the Supreme Court of Canada has interpreted the Capital Cost Allowance in a fairly broad manner, allowing deductions on property which was owned for a very brief period of time, [28] and property which is leased back to the vendor from which it originated. [29] These decisions demonstrate the flexibility of the Capital Cost Allowance as a legal tax reduction strategy.
In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.
Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. The difference between deductions, exemptions, and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.
A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.
Consumption of fixed capital (CFC) is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process of generating new output, and because unlike depreciation it is not valued at historic cost but at current market value ; CFC may also include other expenses incurred in using or installing fixed assets beyond actual depreciation charges. Normally the term applies only to producing enterprises, but sometimes it applies also to real estate assets.
The schedular system of taxation is the system of how the charge to United Kingdom corporation tax is applied. It also applied to United Kingdom income tax before legislation was rewritten by the Tax Law Rewrite Project. Similar systems apply in other jurisdictions that are or were closely related to the United Kingdom, such as Ireland and Jersey.
In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of assets. In the latter case it refers to allocating the cost of an intangible asset over a period of time.
The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system in the United States. Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal Revenue Code. The Internal Revenue Service (IRS) publishes detailed tables of lives by classes of assets. The deduction for depreciation is computed under one of two methods at the election of the taxpayer, with limitations. See IRS Publication 946 for a 120-page guide to MACRS.
In finance, the equivalent annual cost (EAC) is the cost per year of owning and operating an asset over its entire lifespan. It is calculated by dividing the NPV of a project by the "present value of annuity factor":
In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.
Capitalization rate is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value. Most variations depended on the definition of the annual rental income and whether it is gross or net of annual costs, and whether the annual rental income is the actual amount received, or the potential rental income that could be received if the asset was optimally rented.
Capital gains tax (CGT), in the context of the Australian taxation system, is a tax applied to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. Rollover provisions apply to some disposals, one of the most significant of which are transfers to beneficiaries on death, so that the CGT is not a quasi estate tax.
The situation of additional taxes or tax savings resulting from selling the last item of its class in an inventory due to difference between its undepreciated capital cost (UCC) and its salvage value (SV).
In Hong Kong, profits tax is an income tax chargeable to business carried on in Hong Kong. Applying the territorial taxation concept, only profits sourced in Hong Kong are taxable in general. Capital gains are not taxable in Hong Kong, although it is always arguable whether an income is capital in nature.
Accelerated depreciation refers to any one of several methods by which a company, for 'financial accounting' or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset's life. For financial accounting purposes, accelerated depreciation is expected to be much more productive during its early years, so that depreciation expense will more accurately represent how much of an asset's usefulness is being used up each year. For tax purposes, accelerated depreciation provides a way of deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years. This is a valuable tax incentive that encourages businesses to purchase new assets.
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer's ordinary income, the taxpayer has to report any gain from the disposal of the asset as ordinary income, not as a capital gain.
Under the U.S. tax code, businesses expenditures can be deducted from the total taxable income when filing income taxes if a taxpayer can show the funds were used for business-related activities, not personal or capital expenses. Capital expenditures either create cost basis or add to a preexisting cost basis and cannot be deducted in the year the taxpayer pays or incurs the expenditure.
Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), was a United States Supreme Court case.
Taxation may involve payments to a minimum of two different levels of government: central government through SARS or to local government. Prior to 2001 the South African tax system was "source-based", where in income is taxed in the country where it originates. Since January 2001, the tax system was changed to "residence-based" wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Non residents are only subject to domestic taxes.
The Income Tax Department is a government agency undertaking direct tax collection of the Government of India. It functions under the Department of Revenue of the Ministry of Finance. Income Tax Department is headed by the apex body Central Board of Direct Taxes (CBDT). Main responsibility of Income Tax Dept. is to enforce various direct tax laws, most important among these being the Income-tax Act, 1961, to collect revenue for Government of India. It also enforces other economic laws like the Benami Transactions (Prohibition) Act, 1988 and the Black Money Act, 2015.
The oil depletion allowance in American (US) tax law is an allowance claimable by anyone with an economic interest in a mineral deposit or standing timber. The principle is that the asset is a capital investment that is a wasting asset, and therefore depreciation can reasonably be offset against income.